You’re probably tired of hearing how 2020 and 2021 are “unprecedented” or “unpredictable” but the truth is we are sitting in a much different place than we were a year ago. Most dental offices are up and running again, but with stricter guidelines for how daily operations are run. Patient load in some offices is low as they strive to reduce the number of patients in the waiting area at the same time. More of the practice’s budget is dedicated to protective equipment and sanitization.
If you are looking to sell your dental practice in Austin you may be asking yourself, how does this past year affect my valuation? Higher costs and lower collections in 2020 can’t be a good thing, can it? The good news is, every dental office in your market was affected equally by the pandemic and industry experts have developed strategies to find fair and reliable valuations. Find out how valuations have changed in the past year, and what this means for your practice.
What is a Business Valuation, and Why Does it Matter?
If you’re new to dental practice transitions you should know a business valuation is one of the most important documents you need as part of your transition. During the purchasing process the seller provides a business valuation that details every financial aspect of the practice. This document gives the buyer confidence, and is respected by banking institutions for lending purposes.
Matt Howard, a Senior Manager at the consulting firm Blue & Co., performs hundreds of dental practice valuations each year. Before you sell your dental practice, an experienced valuator like Matt will walk you through the process. “My core value is helping you as a seller or as a buyer truly understand what is the market demanding for a practice that you’re looking at or you own today.” explains Matt. The valuators at Blue & Co. are, “trying to take the emotion out of it, trying to just really come in as that third party that gets paid exactly the same amount for every business valuation . . . and truly help you understand what is a fair price from both a buyer and a seller perspective for the practice.”
Do all business valuations work this way? Unfortunately, says Matt, the answer is no. “There’s some other entities out there that set their own prices, and it’s a one pager, and you have no idea how that value is determined.” Without a detailed report like the one provided by Blue & Co. sellers and buyers are left in the dark about what makes up the sales price. “That is not how I like to handle the process.” Matt says. When you sell your dental practice you should have a full picture of everything used to determine its value. At Blue & Co., Matt explains, “we have a very full valuation, 60 pages or more depending on the practice, that helps detail exactly how we arrive at the value. Again, transparency and intentionality is something that I love to bring to a transaction.”
How Dental Practices Were Affected By COVID-19
While COVID-19 shutdowns were not identical in time or length throughout the nation, it is safe to say every practice was affected in some way. Matt explains, “most parts of the country had some impact in March, April, and May, typically the months that we’re seeing where obviously we were either shut down for a period of time or all of that time.”
But, as Matt points out, these three months were followed in most areas by a strong come-back, which is important when you are trying to sell your dental practice. “What I’ve seen over and over again, and I probably worked on 200 or so valuations since the closure, is we came back very strong in most cases . . . So we had three or four months of just better numbers than most practices have seen in general in their entire existence. And that’s that pent up demand, the industry trying to make up for two lost months or three lost months depending on where you’re at in the country.”
In a normal year an individual practice showing ups and downs like this would be concerning from a valuation standpoint. It may indicate poor practice management, or something else going on beneath the surface that a buyer should be aware of. How are business valuators handling these COVID-19 related ups and downs? “In the end,” says Matt, “we have all these ups and downs in the integrity of the data, and it’s just going to make for a lot more looking at that data and making sure that whatever we use in our valuation is really the expectation of what is going to continue on in the practice post-COVID.”
Sell Your Dental Practice With an Accurate Post COVID-19 Valuation
A typical business valuation pulls financial data from the past year in order to predict what your future practice earnings will be and create an appropriate value. “We are taking each month, and the profit and loss statement is basically the revenues minus the expenses, and that shows the profitability of the practice” says Matt. However, since 2020 was a year with so many ups and downs, how do valuations take this data and extrapolate? As Matt pointed out above, valuators are looking closely at the data and setting realistic expectations for how the practice will operate in 2021 and beyond.
Here is how Matt explains the new process of finding an accurate value before you sell your dental practice in Austin: “we are trying to get each month of data for all of 2020. And that way what we can do is we can parse out those months that were most impacted by COVID. And . . . let’s say all three months were a wash for your practice, March, April, and May. We’ll take those out, take those three months out, and either tack on some of 2021 that we already have finalized, or going back into 2019 and adding on maybe November and December of that year. That way we can have 12 full months of data without the craziness of those two or three months.”
Overall, Matt explains, there is a continuity to how practices in certain markets shut down and reopened, which helps valuators determine what the true value of a practice is without the interference of COVID-19 shutdown data. “From a valuation component, I feel like the valuations, again, are substantially similar to what they were pre-COVID,” says Matt. “As long as the practice has shown that it was either proportionally down based on the amount of closure, or even some have been completely intact in 2020.”
Maintaining Value Before You Sell Your Dental Practice
The past year has been difficult, leading many dentists to wonder whether they should cut back their hours, take an extra few days of vacation, or retire earlier than planned. “I think that COVID has been an instigator for practice transitions.” says Matt. “I think some people woke up and realized ‘I have to figure out when my exit point is’ and maybe it’s sooner than later based on what’s going on in the world.”
Before you take certain steps, we recommend thinking about how it will affect your practice’s value. Right now most practices are ramping up production and collections, and in some cases surpassing even their 2019 numbers. “In the end, 90% of the practices that I’ve looked at have either been proportionally down or even better than they were prior to 2019,” explains Matt. This is great news if you are planning to sell your dental practice in the near future, and a good reason to keep your numbers strong.
Matt cautions dentists not to fall into a “slow fade” transition. As Matt explains, a “slow fade” happens like this: “It was a $1 million practice in 2017, and every year [they take] a couple more weeks of vacation, maybe trim a day, hours, maybe stop really pushing some of the dentistry that they think should be done. And at the end of the day, it ends up being a $700,000 or $600,000 practice by the time that we look at it, and that slow fade absolutely impacts the value of the practice.”
As the practice owner you want to get the full value of your practice when you sell. Most dentists will still have that $1 million valuation in mind, not realizing the steps they took over the past few years had such a big impact. Again, Matt explains, “If it’s a $600,000 practice and it was a $1 million practice four years ago, that doesn’t matter as much to [the buyers]. They look at it as a $600,000 practice and so do the banks.”
The lesson here is that if you want to sell your dental practice in Austin you should worry less about the several months of lock-down and restrictions during 2020, and more about maintaining and increasing your value in 2021. “Sellers are still out there.” says Matt. “I do think [COVID] has been a big instigator to get a lot of them engaged. And again, I do think we’re in the sellers’ market still.”
However, Matt also cautions that the market could flip in the next few years based on the current demographics of dental practice owners. The American Dental Association reports 37.4% of dentists are over the age of 55. This means that the market may soon flood as these dentists near retirement. “We do have older owners of dental practices, just based on the baby boomer generation [who] still owns the majority of practices.” says Matt. “So there will be a lot of activity over the next ten years or more as the baby boomers do exit practice ownership from a general perspective.”
Sell Your Dental Practice with the Experts
When you’re ready to put your practice on the market how do you learn about the process, avoid mistakes, and get the most value out of your investment? The experts at DDSmatch Southwest and our partners are here to help. One of our top priorities in every transition is transparency. We want both buyers and sellers to know exactly what to expect, be comfortable asking questions, and feel confident in the process.
When it comes to your business valuation Matt and his colleagues at Blue & Co. take the same approach, “I mean, jumping on the phone with [the sellers] and helping them understand what the value is and how I got there and here’s the things that we consider.” explains Matt. “And they can ask questions, and sometimes they have their CPA on the phone too. And that CPA will ask questions. Again, there’s nothing to hide here. We’re trying to make it completely above board transparent, open and honest about everything that went into the valuation and how the value was determined.”
At DDSmatch Southwest we provide a Trusted Transition Process that allows you to sell your dental practice with confidence. This clear and consistent path will take you from thinking about your ideal transition to completing a successful sale. If you are 3-7 years away from retirement we recommend working with our experts to get the most out of your life’s work with our Practice Optimizer Experience. This program will walk you through everything you need before retirement, including an Ideal Retirement Calculation, Estate Preparedness Plan, Dental Insurance Navigator, and more. We will guide you through your final years of owning a practice so you can move on to the next phase of your life confidently.
Even with the ups and downs of the past year, now is one of the best times to transition your dental practice. As Matt pointed out above, you do not need to be concerned if a COVID shutdown affected your practice’s production in 2020. Take advantage of the current sellers market and contact DDSmatch Southwest for a consultation. Get started by visiting our contact page or calling 855-546-0044 today.